Groupon sheds quarter of its value as Street questions biz

By Sayantani Ghosh

Groupon Inc lost more than a quarter of its value as its shares sank to a record low on Tuesday, after dismal results drove more investors away from the once-red-hot company and raised questions about its main business.

The daily deals purveyor founded by quirky music graduate Andrew Mason, this year joined fellow recent dotcom debutantes such as Facebook Inc and Zynga Inc in shedding a massive chunk of its market value in past months.

Groupon hit $5.46 in afternoon trading, down 72 percent from its $20 November IPO price and losing almost $1.3 billion of value on Tuesday. The total value lost since its IPO is nearly $9.4 billion.

On Monday, the company blamed a flagging European business for sharply missing second-quarter revenue expectations.

Tuesday's Internet stock selloff extended to Facebook and Yelp Inc, which fell 4 percent to 6 percent. Angie's List Inc, which provides consumer reviews of local services and businesses, fell 16 percent on the Nasdaq as a post-IPO lockup on its stock expired on Tuesday.

"It appears the daily deal business has run into a wall, with some blame going to the European recession. We believe the weak trends are likely to persist," Benchmark's Clayton Moran wrote after lowering his rating on the company to "hold" from "buy."

"From what we can tell, the bears were right."

Groupon -- first billed by Forbes as the fastest-growing private company in history -- began in 2008 by offering huge discounts on local services from spa treatments to restaurant meals to millions of online subscribers.

It's phenomenal growth culminated in a turbulent November IPO, marred by multiple regulatory questions about its accounting, such as booking all revenue from voucher sales even though merchants get a hefty cut of deals.

Mason, a novice CEO prone to bombastic staff memos, initially defended Groupon as a unique corporation, but later gave in to investors' demands for greater balance-sheet transparency. But the company's stock has headed south since its debut as fears grow about its ability to sustain the growth of its daily deals business.

Some remain hopeful for the long-term. Barclays' Mark May maintained his overweight rating on the stock, even while cutting his price target to $15 from $27.

"While the company is still relatively young and much execution lies ahead, we continue to view Groupon in the early stages of what could prove to be a significant and long-term growth opportunity in the local commerce sector globally," he wrote.

DOWNGRADED EXPECTATIONS

At least two brokerages on Tuesday downgraded Groupon and six others cut price targets on the stock, which fell 27 percent to $5.51 as the most heavily traded stock on the Nasdaq.

Its core business of promoting daily deals has slowed, prompting it to expand into new areas such as consumer product sales and merchant services that have lower margins.

Second-quarter billings, a key metric for online businesses, fell 5 percent from the first quarter in its first-ever sequential billings decline.

Meanwhile, stiff competition from rivals such as LivingSocial, Amazon.com and Google, may be compressing margins, by offering participating merchants higher shares of deal revenue. Gross margin in the second quarter fell 2.4 percent from the first quarter, to 76.2 percent.

"A sequential decline implies a rapidly deteriorating core business, i.e. the daily deals business, and Groupon needs to act fast to fill up this hole with new initiatives such as goods," Citi Investment Research analyst Mark Mahaney said.

Analysts say Groupon's goods business, which sells discounted consumer products, and its other fast-growing new initiatives may not be as profitable as its daily deals.

Sales of goods accounted for 11 percent of Groupon bookings in the second quarter.

"We'd prefer the goods business to be an incremental growth driver rather than the primary driver, and we believe Groupon has less competitive advantage overall in this segment," J.P. Securities analyst Doug Ammuth said in a note.

Groupon holds nearly $800 million in accrued payables and expenses to merchants and this is a concern despite $1.2 billion in cash on its balance sheet, Evercore Partners analysts added.

Revenue from Groupon's international business fell 4 percent in the second quarter from the first. The international business accounted for about 54 percent of total revenue in the second quarter.

Europe has a larger number of high-price offers than Groupon's North American business and this is more prone to economic problems, JP Morgan's Ammuth said.

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